SEC begins its investigation of accounting at OfficeMax

June 15, 2005|By Becky Yerak, Tribune staff reporter.

The nation's top securities watchdog has launched an investigation into the accounting problems that surfaced last year at OfficeMax Inc.

In December, the Itasca-based office-products retailer started an internal probe after a supplier claimed that certain OfficeMax workers acted "inappropriately" in requesting payments and in falsifying documents for $3.3 million in billings.

The company said its internal investigation was completed in March, resulting in the firing of six workers.

The Securities and Exchange Commission, however, isn't ready to move on.

The SEC has issued a formal order of investigation into the matter, OfficeMax said Tuesday. The retailer, which has 41,000 workers and 935 superstores, said it will cooperate with the SEC investigation.

"The SEC typically will proceed with a formal investigation if they believe the evidence points toward potentially fraudulent accounting," said Richard Hastings, senior retail analyst with Bernard Sands LLC. "And the lines between errors and mistaken entries and fraud are very blurry lines."

The stock market took the news in stride. OfficeMax shares were down 3 cents, or 0.1 percent, to close at $30.10.

The SEC declined to comment Tuesday.

The probe is merely the latest drama playing out at OfficeMax.

In February, Christopher Milliken resigned as chief executive. His departure coincided with the announcement by the nation's No. 3 office-supplies retailer that it had overstated earnings last year by failing to record certain payments to vendors, though the company said Milliken resigned due to his "overall performance to date."

During the holiday season, OfficeMax had weaker-than-expected sales.

Ultimately, OfficeMax said its own review revealed operating income was overstated by $4.3 million in the first three fiscal quarters of 2004.

Then in March, the retailer found itself under pressure by a major investor, K Capital, which had pressed for a board seat, citing "the company's weak performance and the poor quality of decisions."

That issue was resolved on April 24 when K Capital withdrew its candidate for election to the board in exchange for OfficeMax being willing to appoint an additional independent director at the end of June and to consider a candidate proposed by K Capital.

Also in April, OfficeMax hired Sam Duncan, most recently CEO of ShopKo Stores Inc., to become its new chief.

On May 3, OfficeMax revised first-quarter results to a loss of $5.3 million from a profit after setting aside money to pay for legal matters.

In a May 5 filing with the SEC, OfficeMax noted that it is improving the training of its accounting and merchandising workers.